Bloomberg News

Indonesia Holds Rate as Currency Drop Revives Inflation Risk

January 12, 2012

(Updates with comment from economist in third paragraph.)

Jan. 12 (Bloomberg) -- Indonesia kept interest rates unchanged for a second month, extending a pause in monetary easing after a weaker rupiah and a government plan to contain fuel subsidies threatened to spur inflation.

Bank Indonesia kept the reference rate at 6 percent, Governor Darmin Nasution said at a press conference in Jakarta today. The decision was predicted by 13 of 18 economists in a Bloomberg News survey, with the rest expecting a quarter- percentage-point cut.

“It will sustain some support for the Indonesian rupiah, reducing the risk of imported inflation and keeping domestic purchasing power high to support the overall economy,” said Gundy Cahyadi, an economist at Oversea-Chinese Banking Corp. in Singapore. “We see all signs in place that the central bank will not make any rate move in the immediate future.”

The rupiah slid more than 6 percent against the dollar in the past six months after rate cuts in October and November made Indonesia one of the first Asian nations to reduce borrowing costs last year. While inflation has eased, policy makers need to watch the impact of a possible increase in fuel prices as the government may limit subsidies in 2012, central bank Deputy Governor Hartadi Sarwono said this month.

“Bank Indonesia has been the region’s most aggressive rate-cutter recently,” Gareth Leather, a London-based economist at Capital Economics Ltd., said before the decision. “Recent interest-rate cuts, which have contributed to further falls in the Indonesian rupiah, could also lead to higher inflation by increasing the cost of imported goods.”

Rate Cuts

The rupiah rose 0.4 percent to 9,160 a dollar after the decision. It fell 6.4 percent in the past six months, making it Asia’s worst performer after the Indian rupee and the South Korean won. The benchmark Jakarta Composite index of stocks closed little changed today.

Indonesia’s intervention efforts have been sufficient and the important thing is it shouldn’t fight the trend alone, Nasution said today.

Europe’s debt woes have hurt Asian exports and damped growth, pushing down regional currencies as investors sold emerging-market assets. Asia-Pacific central bankers from Australia to Thailand started easing monetary policy in recent months to support growth, while others refrained from cutting rates even as they halted tightening.

‘Reasonable’ Rate

The Bank of Korea may keep its benchmark unchanged at 3.25 percent tomorrow, a Bloomberg survey showed, and Sri Lanka’s central bank held borrowing costs for a 12th month yesterday.

Indonesia’s current benchmark rate would still be “reasonable” should inflation range from 5.2 percent to 5.4 percent in 2012, Nasution said today. Bank loans growth of 25 percent to 26 percent was “normal,” he said. Commercial bank loans may expand 23.6 percent in 2012, Deputy Governor Halim Alamsyah said, citing preliminary estimates from lenders.

“The rate is still in line with the achievement of inflation targets in the future, the efforts to maintain the stability of the financial system, and remains conducive to supporting domestic economic expansion amid global turbulence,” Bank Indonesia said in a statement today.

Nasution reduced Bank Indonesia’s reference rate by a quarter point in October and half a percentage point in November to 6 percent. Inflation slowed to 3.79 percent in December, easing for a fourth straight month, and the central bank has said the 2012 inflation target for prices to rise 3.5 percent to 5.5 percent will probably be met.

Watching Inflation

“I continue to think that there is a case for them to cut rates further,” said Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc. “Inflation remains below the target and at least within early first-half should remain low. At the same time the growth picture is showing some signs of weakness.”

Still, Bank Indonesia remains mindful of inflation even as it sees room to cut interest rates further if needed, Deputy Governor Hartadi Sarwono said Jan. 5. The central bank said today the government’s plan to limit the sale of subsidized fuel may add as much as 0.94 percentage point to inflation this year.

The Indonesian government plans to limit the sale of subsidized fuel from April 1 to cut energy costs, Energy and Mineral Resources Minister Jero Wacik said Jan. 9.

Indonesia’s growth has so far weathered the faltering global economy, helping the nation regain investment grade rating for its sovereign debt at Fitch Ratings in December after 14 years.

Growth Forecast

Southeast Asia’s largest economy may have expanded 6.5 percent in 2011 and in the last quarter, Nasution said. Growth this year may be 6.3 percent to 6.7 percent, he said.

Keeping borrowing costs low may help President Susilo Bambang Yudhoyono boost investment in the economy as he targets annual average GDP growth of 6.6 percent through the remainder of his term ending in 2014.

The rate cuts in 2011 and the government’s push for land legislation that will speed up works projects have helped bolster prospects for Indonesian companies, said Harry Su, a senior vice president and head of research at PT Bahana Securities in Jakarta.

“After BI cut rates by a total 0.75 percentage point last year, banking stocks became more attractive, plus the movement of infrastructure projects will spur demand for investment loans,” Su said before today’s decision. Stocks that may gain include PT Jasa Marga, Indonesia’s largest toll-road operator, PT Wijaya Karya, a state-owned construction company, PT Bank Negara Indonesia and PT Bank Rakyat Indonesia, he said.

--With assistance from Hidayat Setiaji, Berni Moestafa and Greg Ahlstrand in Jakarta, Manish Modi in New Delhi, Jan Dahinten in Singapore. Editors: Stephanie Phang, Rina Chandran

To contact the reporters on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net; Widya Utami in Jakarta at wutami@bloomberg.net;

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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